Valar Atomics and Day One Ventures

One of the hardest parts of being a CEO is exercising transparency even when it hurts. But this is a really really important part of our culture at Valar Atomics. We wear our mistakes and learnings on our sleeve and talk about them a lot. Our competitors also talk about them a lot, which hurts us a little—but overall, we massively benefit from having a culture of truth telling and visible mistakes. Our mission is to make energy cheaper and more abundant in the universe than ever before. The only way to accomplish this is with a culture that loves the truth and biases toward transparency.

This is one of those instances where being transparent is painful.

I want to talk about our relationship with Day One Ventures.

Day One invested $1m in our seed round and $15m in our Series A. This leaves them with a total fully diluted ownership of less than 5%, but retaining Major Investor status. Major Investor status comes with some information rights as well as pro rata rights for future rounds. So far, vanilla venture.

Fast forward a bit to our Series B.

Earlier this year, I got a term sheet from Sequoia to lead our next round. This was pre-empted and outside of our normal fundraising cycle, but we already had several large checks circled up and looking for opportunities to participate, including a large insider who had a large and strategic reinvestment into the company lined up.

As you probably know if you’re in the venture world, a round like this generally calls for having the pro-rata rights of the Major Investors waived. Our Major Investors were happy to waive and did so immediately. This doesn’t mean that no existing investors will participate, but it removes the right to invest a certain amount in this round, leaving the allocation decisions with the company.

However, our Investor Rights Agreement had a right in it called a spring back. Spring back rights basically say that, after the pro-rata is waived by the majority of the Major Investors, if one of the Major Investors is then given allocation in the round, pro-rata rights spring back proportionally to the amount of allocation given to that Major Investor. In this case, as mentioned above, spring back rights were in play because, while we did waive the pro-ratas in this round, we also had a sizable insider that we wanted to participate for strategic reasons.

This is a very common setup in hot venture rounds, and we did the normal thing. I.e., we went back to the Major Investors and asked them to hold back their allocations to zero, despite the spring back.

We have an incredible set of investors who were absolutely supportive of this and believe in the long-term vision and appreciation of stock value and future opportunities for participation more than the short-term gains from forcing allocation.

With one exception. Day One.

Day One was absolutely insistent that they be allowed to participate in this round and refused to hold back their springing pro rata rights, despite the fact that it was obviously not the right thing for the business and shareholders. We argued about it for about a week. I consistently appealed to them to do what was in the best interest of the company and hold their allocation so that we could close the round with the best possible set of new partners and minimal dilution. Again, our other wonderful investors did this immediately without even having to argue it; their message to me was “we are entrusting you with making this a multi-trillion-dollar company; we want to invest again, but if you’d like us to hold back this round we fully understand and support that, despite the spring back right.”

Day One was alone in their extreme resistance to this request. Over the course of the week, their tone became more and more threatening.

This situation caused us to back up and think about the overall dynamics of the company and of the Major Investors.

I have personally never been a fan of spring back rights. My strongly held belief is that the best investors earn their way into every new round by showing up time and time again with help, intros, quality capital, references, assisting with talent, back channels, and overall helping me build the world’s biggest energy company. Spring back rights stand in the face of this incentive. There are many times when one particular insider has earned, either through a background capital source or through a particular level of help to the company, a special spot in a round. I think that it maximizes the value of the company to have the flexibility to be able to use insider capital with a greater degree of discretion, especially when crafting larger rounds like the one in question ($1B made our Series B one of the largest Series B’s of all time).

My long-standing belief is that spring back rights are unproductive, and we functionally operated this way, evidenced by the fact that the other Major Investors held their allocations down when asked.

So this forced us to ask the question: if we don’t believe that spring back rights are productive to creating the maximum value to shareholders and unnecessarily restrict management in crafting the best possible rounds, why do we have them at all?

So, the day before closing, we went to the group of our Major Investors holding a majority of the company’s outstanding stock and asked them to amend the Investor Rights Agreement to remove spring back rights. No surprise, the majority of our Major Investors agreed with us, and we executed the amendment with those Major Investors.

With spring back rights removed from the IRA by approval of a group of Major Investors holding a majority of our outstanding stock, we were then free to set allocations as well as we could to create the most value for the company in this round.

What has happened since is very disappointing.

Day One Ventures has chosen to lawyer up with Quinn Emmanuel, the most aggressive litigation firm in the country, and for the last few months, they have been sending us threatening nasty grams. Their ridiculous claim is that the modifications that the Major Investors made to the IRA somehow disadvantages and singles out a single party (Day One). That’s not accurate; removing spring back rights affects all Major Investors equally. Day One is not alone in being a Major Investor that was held back from participation in our Series B, and it is not alone in losing spring back rights under the IRA amendment. The difference is that the others believe in me and my mission and know that there will be many many bites at this apple with incredible value inflection in the future and want to play the long game of relationship that creates compounding value over time. Day One’s approach has been different.

We view this as inappropriate behavior from any venture firm to one of its own portfolio companies. I am not sure what Day One hopes to get out of this. I can however assure Day One that we will not be bullied in secret.

Today, Valar Atomics filed a lawsuit for declaratory relief in Delaware court. In simple terms, we are going open kimono. If the court believes that we were in the wrong, we will follow the orders of the court.

They sent us these letters in secret. We are laying the facts out in the open and preemptively asking the court for their opinion on the matter.

We will abide by whatever the court’s decision is. But from this point forward our relationship with Day One Ventures will be the minimum required by law.

They do not have our trust, confidence, or recommendation to any other party in the venture world. There is no operational impact to Valar — Day One has no rights to non-public technical information and no board seat or observership.

I’ve learned a lot about what it means to have good partners through this experience. It has made me even more grateful for the incredible partners on the rest of the cap table. I will never forget these lessons.

Sincerely,

Isaiah Taylor Founder and CEO, Valar Atomics